Macroeconomic Implications of Pension Reform or How to Pay for the Crisis

The national debt stocks of the Euro Area countries and the UK are rising sharply as a result of the economic crisis, and equilibrium output is falling, with the capital stock contracting. Both problems could be alleviated by the rapid introduction (but slow implementation) of a policy to extend working lives. The paper analyses a delayed extension of working lives in the Euro Area and the UK. A distinction is drawn between the impacts of these changes on output (GDP) and income (GNP) in open economies with capital mobility. Increasing working lives will in equilibrium raise consumption and tax revenues and reduce pension spending. These gains by the government can be used to improve services, cut taxes or pay off debts.